By Snigdha Kalra
Indias mid-year Economic Survey was published on 11th August 2017. It suggests that investments in renewable energy should be made in a calibrated manner, as social costs are high in promoting green energy. It implies that the opportunity costs of replacing conventional energy sources like coal for generation of electricity, with renewable sources like solar and wind energy, are large enough to be put into focus.
There is a definite need to make the shift from non-renewable energy sources to renewable ones. However, that transition should be made carefully, ensuring that there is minimal loss of revenue.
The high costs of renewable energy
The survey estimated the social costs (private cost plus externalities) of renewables to be around Rs. 11 per KWh. This is three times that of coal. This statistic poses a dilemma as to how to go about the transition from conventional to renewable. Coal is scarce but inexpensive. Solar energy is abundant but costly.
A sudden shift to renewable energy (RE) will lead to a crisis, as it will reduce the use of assets in conventional energy generation plants. They will not be used as much as is their capacity, and the investment will go to waste (referred to as stranded assets). This will result in a loss of revenue due to suboptimal utilisation of coal and other conventional power plants.
The connection with rising NPAs
The problem of Non Performing Assets with banks in India has been worsening day by day, with no signs of improvement. Non Performing Assets (NPA) refer to the loans which are at risk of default. The extent of the NPA crisis is such that some banks have reported up to 15% of their loans as bad loans. In such a dire situation, a sudden shift from conventional to renewable sources of energy is only going to exacerbate the already uncontrolled problem.
The Survey said that the NPA ratio pertaining to electricity generation was around 5.9% from total advances (outstanding) of Rs. 4,73,815 crore. The total advances to coal sector were Rs. 5,732 crore with an NPA ratio of 19.8%. Stressed assets in these sectors due to the transition could heavily impact the banks more exposed to these sectors, and send them sliding down the NPA path.
Plans for the future
Today, the social costs are high. But some years down the line, the situation is set to improve. According to the Economic Survey, the social costs of renewable energy and the difference between the costs of RE and coal will fall in the run-up to 2030. Currently, out of the total social cost of renewables, 30% is accounted by stranded assets in coal. However, this percentage will fall to a meagre 2.4% by 2030. So, with the goal of a sustainable future in mind, a transition will prove beneficial in the long run.
Thus, a calculated approach towards the transition is the way to go. This could be done through an analysis of the social costs associated with each alternative source, and subsequent identification of their merits and demerits on a holistic basis, the Survey said.
There is, without a doubt, a need for increased use of renewable energy sources. But the corresponding crowding out of coal and other non-renewable sources needs to be gradual, one step at a time. This will give time to these sectors to adjust their assets and mechanisms according to the new order of things, and minimise the associated losses.
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